Examination of Witnesses (Questions 20
- 39)
TUESDAY 20 JUNE 2000
MS PAMELA
TAYLOR, MR
JOHN CUTHBERT
MR BOB
BATY AND
MR ROBERT
WEEDEN
20. So you felt you had no input, and perhaps
the DWI had no input into the compilation and agreement of the
timetable?
(Mr Cuthbert) That is certainly the impression that
we had, and indeed, the Environment Agency had their own timetable,
which was different from Ofwat's.
Chairman
21. There was no joint meeting between any of
the regulators and yourselves to discuss the timetable. That is
what you are saying.
(Ms Taylor) Not to our knowledge.
(Mr Baty) There were odd meetings during the process
itself.
22. At the beginning there was no getting round
the table.
(Mr Weeden) Not before the Ofwat timetable was set.
There were some meetings after that to try and get everyone in
line and see what problems they were having with the timetable,
but it was after the event rather than before.
23. Why were the Ministers three months late
with their input?
(Ms Taylor) I do not think we know.
24. What impression did you gain about that?
(Ms Taylor) We got the impression from the very beginning
that the timetable had been set and was really broadcast to all
the players, and then the players had to pick up on that and try
to run with it. The Environment Agency did not want to and was
quite critical at some points. Government, as far as we are aware,
tried quite genuinely to do so. We are not aware of any appalling
reason why they did not; they just could not meet it.
Christine Russell
25. Can I just ask you one final question: during
the process did the cooperation and coordination actually improve,
or did it deteriorate? Were things working better at the end?
(Ms Taylor) It did not improve. That is not the fault
of DETR, who did try. This sounds critical of DETR. It is not,
which is why earlier I said "enhanced role" because
I did not want the implication that they had been useless; they
have not. We would like them to grab the process at the beginning,
but in terms of as it went on, I think we suffered because the
Environment Agency and Ofwat were singularly unsuccessful in working
together during the process.
Joan Walley
26. Can I go back to our main concern as a Committee,
which is how we finance our environmental improvements. Can I
ask you in terms of the water companies how your requirements
to make profits and look after the needs of your shareholders
sit comfortably with the whole issue of having sufficient money
to provide for the environmental infrastructure of the country?
Is it not the case that the profits of your private member companies
are such that there is not really a problem; you could just dip
into the shareholders' profits to be able to fund improvements?
(Ms Taylor) Let me begin with that, and I will ask
my members to comment on that. It is a question of balance, in
that the industry in England and Wales was privatised in the first
place because the then government was faced with a bill that it
did not want to pick up, and a major part of that bill was to
do with the infrastructure and to do with environmental obligations
and so on that would be coming along. Having walked away from
the bill, somebody had to pick it up, and obviously eventually
that, of course, is the customers of the companies in England
and Wales. I say it is a question of balance, because the companies
have to remain sufficiently viable that they can attract the investment,
so that they can spend the money, so that they can protect the
environment. So it is a question of balance, obviously. What we
would argue for is that that balance is borne in mind. We cannot
have financially unhealthy companies. If they are financially
unhealthy, they cannot perform, and you do not get a second chance,
particularly at being stewards of the environment.
27. Can I come back to you on that point? We
have had some evidence given to us which suggests that the division
of responsibility that was set up at the time of water privatisation
has actually been eroded over time, and so much of the way in
which the original water privatisation set various authorities
to regulate over these issues has been eroded. Would you agree
with that statement?
(Ms Taylor) I am not sure I understand it. I do not
want to make a cheap point.
28. It is really suggesting that there was an
inability in the first place of the NRA, and subsequently the
Environment Agency, to focus on the environmental regulatory functions
because of the distracting and overlapping responsibilities deriving
from its river management and flood defence functions, so that
the NRA, when that was there, was never really able institutionally
to provide the proper structure for regulation, but that subsequently
Ofwat has actually encroached upon what was the NRA and is now
the Environment Agency.
(Ms Taylor) I understand. Certainly in the past, when
there was an inquiry into the role and effectiveness of the Environment
Agency, we said at the time that we felt that the Environment
Agency had failed in terms of setting strategic long-term goals
for the water industry. Maybe that is what that is referring to.
Obviously if there is a vacuum it will be filled. I know that
there have been suggestions that that may have been filled to
some extent by Ofwat.
(Mr Baty) That highlights the point we were making
earlier about having clarity at the outset of people's expectations
and who is responsible for that, setting out what is to be delivered.
The issue then for the regulator is to provide the economic framework
for the companies to deliver. That clearly is a robust discussion
because we are all trying to estimate the cost of the investment
that we are trying to make, but having got that, coming on to
the second part of your question, clearly the challenge for those
of us managing these businesses is on the one hand to meet customers'
expectations with the delivery of the programme and to do those
as efficiently as we possibly can, and to improve efficiency,
which is what we have been challenged to do, and we have been
delivering over the last two quinquenniums and intend to continue
going forward, which will then bring some benefits to shareholders,
who will then be encouraged to continue to invest in the industry.
It is a circular issue. You cannot have one party without the
other. We need the investment. We have seen in recent times what
the effect has been as far as investors are concerned. They have
taken a different view of the industry going forward. Our challenge
is to make sure that the guidelines and requirements are clearly
defined, then develop our processes to deliver those as effectively
and efficiently as we possibly can. We have improved the track
record in delivering outputs for customers' benefit over the last
ten years. The output of the industry over the last ten years—and
I have been in the industry a long, long time—is phenomenal
compared with anything that was delivered 30 years previously.
It is a tremendous achievement, but we are charged with delivering
that as efficiently as we possibly can, and that gives benefits
to the other parties who are interested in the success of the
industry overall.
29. Given that the way in which future regulation
is going to be determined is going to be the subject now of further
legislation, and given what you were just saying, how are you
going to ensure as an organisation that your views on that are
going to be included in it so that you can ensure that better
set-up?
(Mr Baty) With any debate that is taking place on
how the industry would be regulated going forward, clearly we
want an input into that process, and to share our thoughts. We
are not trying to hide anything. We are actually trying to contribute
positively to how the thing can be managed, the output that we
all want to see from an environmental point of view and a customer
service point of view in the most sensible and cost-effective
way. We need to do that in an economic balance that keeps everybody
who is interested in the success at the party. If one party starts
to move away, clearly that creates difficulties for all of us.
30. Is it in your financial interests for environmental
standards to be raised and to have higher cost estimates for each
project so that in the end you can manage to complete that work
more cheaply without affecting your profits?
(Mr Baty) The straight answer is: we want clarity
on what is to be delivered. That is the most important thing from
everyone's point of view. How we deliver it then is the challenge
which is placed on the companies to do that as effectively and
as efficiently as possible. I think our track record is really
quite remarkable in delivering all of the enormous programmes
around the country to time and sensibly to budget, give or take
planning permissions, etc. If you compare that performance with
a lot of other investments in the country, it is fantastic. We
are not trying to deceive anyone or distort it in any way, shape
or form. Let us have clarity of what is to be delivered, and we
will do our damnedest to deliver it in the most cost-effective
way to the benefit of, say, customers to have the benefit of the
investment, of society generally, and to keep our investors at
the party, because without those we would have a serious problem.
31. Following on from Ms Taylor's comments at
the beginning about wanting this to be a platform for the next
review, and your comments that you want to have this clarity,
can I put it to you that some of the evidence that we have received
suggests that the way in which the review so far has been implemented
has really been about an end of pipe solution; it has been about
trying to get work and infrastructure investment done perhaps
for a quick fix when there is a perceived problem rather than
looking at the entire process and really concentrating on the
end of pipe solution, if I can put it that way, rather than on
looking at the whole sustainable, biodiversity approach, which
would perhaps lead to a very different set of conclusions as to
what infrastructure investment would be needed if we were going
to put the precautionary principle first.
(Mr Baty) That perhaps would be the case, and it comes
back to the initial point. Let us get that on the table at the
outset and discuss exactly what we want to do rather than trying
to bolt that on to a process which is on a very tight timescale
and that has deadlines by which time decisions have to be delivered.
If that is the case, let us get that up front and understand what
we are trying to do.
32. Could you give me any examples of where
the Periodic Review so far has not really encouraged water companies
to seek innovative and sustainable solutions in their work, perhaps
what you would have felt to be a priority but could not be because
of that lack of clarity?
(Mr Baty) I can only go back in time. I cannot immediately
think of an example now. If we go back in time, there are certainly
issues with the coastal programme where the first phase of coastal
programmes were based on a long sea outfall with a discharge at
the end of the pipe. If there had been greater thought applied
then and people had said, "We don't actually want that. We
want greater on-land treatment", for example, that would
have set us on a slightly different course, rather than a catch-up,
which is what happened to some companies in the last Periodic
Review. It is those sorts of changes.
33. Would you agree, for example, with people
like Surfers Against Sewage and the RSPB, who cite, for example,
the Urban Waste Water Treatment Directive, which I think is an
instrument that wants water treated at the end rather than looking
at means where there could be investment further down.
(Mr Baty) Again, these are areas for society at large.
It is not for companies to decide one way or the other, but it
is right to have a proper debate on what is required.
34. But you are saying that neither the DETR
nor Mr Byatt has actually given proper account of that.
(Ms Taylor) There is no room within the process for
that to happen, because we have five years, stop, start again,
next five years, stop, start again. If we were able to have the
debate, and those examples which you are bringing forward are
the kind of things that should be in that discussion, about what
society wants, if we then had those as the goals that we are trying
to achieve, that would be a process and a debate that would have
our full support.
(Mr Baty) The issue that arises from that is the timescale.
It would be more expensive to do that. If society wants to pay
less in the immediate future, the timescale will be slightly longer,
and we understand that as part of the process going forward.
35. Can I go back to what Mr Chaytor said at
the very beginning, which was about your aggressive contribution
to the evidence? You do make reference to the way in which the
water companies and Ofwat differently assess the condition of
assets. How serious do you think this problem is?
(Mr Cuthbert) We think it is serious. Let us take
infrastructure assets, which is the area which is, of course,
the most difficult, because those assets are not visible assets.
It is not possible to go along and do an entirely accurate asset
inventory in the way in which you could do with non-infrastructure
assets, ie those above the surface. The industry does have a very
real concern that the approach which Ofwat is adopting is not
sustainable in the long term, because effectively what Ofwat have
done in assessing the need for maintenance expenditure is to almost
plan on the basis that you can continue to reduce that amount
of expenditure until such time as you have a failure in the system,
and that is not the way in which companies approach the management
of those assets. There have been a number of attempts made to
try to present arguments to the regulator to justify the levels
of expenditure that the industry believes is necessary. There
has been very little constructive debate around those submissions.
What we have had is a rejection of the argument without any real
method of saying "okay, if you did not like those arguments,
if you did not think they were sufficiently robust, what do we
need to do?" That next stage, that more productive stage,
has not taken place. That is, we think, one of the big challenges
for the next five years and beyond and, again, involves a number
of stakeholders in trying to work together. What we want as an
industry is something that everyone agrees is an acceptable approach
towards assessing the amount of investment that is needed in order
that we can then manage and invest in the assets to meet the levels
of service that customers want. At the moment, as I say, to manage
the infrastructure assets on the basis that you reduce your expenditure
until you fail is not, in our view, a very sensible way to go
forward.
Mr Keetch
36. My apologies, I have to disappear by twelve.
Going back to the National Environment Programme and how you deliver
that, and you have touched partly on this already, Ian Byatt said
that by 2005 everything will be wonderful and the damage of the
past 200 years will all be nicely sorted out. Was he right to
say that?
(Mr Baty) In terms of coastal clean up, the transformation
will be short of miraculous but it will be tremendous. There may
well be other things to do in terms of addressing many of the
known issues, coastal discharges and what have you, that are very
visible, that is important, but that then exposes a number of
others which perhaps will need attention.
37. What are the big things coming up on the
radar screen?
(Mr Baty) In my view and, again, pardon me for focusing
on coastal waters but it happens to be the big concern in my life
and has been for the last ten years—
38. It does not affect me in Herefordshire but
carry on.
(Mr Baty) Those discharges will be ceased and will
be subject to treatment but there will be pollution from other
sources causing failure of bathing waters, agriculture run-off,
pollution into rivers and discharges into coastal areas. Those
are becoming more visible now, of course, but in the early part
of the programme they were invisible because they were totally
overwhelmed by the point of source of the discharge. As we address
those, other sources of pollution become apparent and there will
be a need to do something positive about those.
39. In your submission you commented that the
industry were not clear how the Environment Agency actually sets
its priorities. Do you think the priorities they set are the most
cost-effective? How would the industry like to prioritise the
schemes that are set out?
(Mr Cuthbert) Again, one should start by saying that
it is a hugely difficult task and the Agency have used their assessment
techniques to prioritise projects. Companies have had varying
levels of input into that process and a lot of it is done at regional
level within the Agency so some companies will have had more input
and more constructive dialogue than others. It is one of these
areas where I suppose we all struggle with the true cost of environmental
benefit and I think the Agency have made a good start with that
but, like so many of these things, there is further work to be
done. As an industry we would like to be part of that work in
taking that forward.
(Ms Taylor) I think we accept that we need to have
a more constructive partnership with the Environment Agency than
we currently enjoy. One of the problems we have felt is that the
Environment Agency does not do enough in terms of the big picture,
big goals and looking forward and there seems to be more than
one Environment Agency when it comes to working with them on a
regional and local basis. I think these are the understandable
problems you see with a very large and comparatively new organisation
being set up. Certainly we think there are issues that they need
to address but we do not just say that we should sit there and
say "when you have addressed this let us know", we also
accept that we have a responsibility in making that relationship
work successfully as well.
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